- JPMorgan’s top banks analyst Kian Abouhossein said in a note Wednesday that Deutsche Bank needs to slash its US business.
- The US business consumes 20% of Deutsche Bank’s capital, has 10,000 staff, and yet delivered a return on equity of less than 2% in 2017, according to Abouhossein.
- Deutsche Bank should slash its equities business and investment banking business, he said.
JPMorgan’s top banks analyst said Deutsche Bank needs to slash its US operation.
In a note out Wednesday, Kian Abouhossein estimated that Deutsche Bank’s US business, which he says is centered around corporate and investment banking, consumes 20% of the bank’s capital, has 10,000 staff, and delivered a return on equity of less than 2% in 2017. For reference, most bank analysts assume a cost of equity of somewhere around 8% to 10%, meaning that Deutsche Bank’s US business is destroying shareholder value.
As such, Abouhossein suggests Deutsche Bank cut its equities business and its investment banking business.
“A self-funded US restructuring is the key to i) unlock capital trapped at low ROE of c2% in ’17E; ii) reduce asset exposure & iii) improve group ROE in our view,” the note said. “In this option, DB would reduce its US to US exposure resulting in shrinkage of US equities as well as of US corporate clients. The new strategy will be one of serving European companies in Europe with a Tier I IB and European companies outside of Europe.”
It’s worth noting here that Deutsche Bank has made changes to its US equities business, with Peter Selman joining Deutsche Bank last fall as the firm’s global head of equities. Selman told Business Insider in March that he expected to have to manage the business aggressively.
“At the end of the day, there are a few underlying trends which aren’t going to go away, which is going to continue to make it a challenging environment for equities businesses,” he said.
The bank has been investing in investment banking, meanwhile, hiring more than two dozen managing directors and directors in its US corporate-finance division in 2017. Still, the bank ranked outside the top ten for dealmaking revenues in the first quarter of 2018, according to Dealogic.
Here’s a summary from the note:
- Deutsche Bank’s US operation consumes a lot of capital: “DBK’s US business consumes material balance sheet resources with an estimated $US326bn of GAAP assets of which $US148bn is in the US IHC and $US178 billion in the branch. This equates to c20% of DB’s total €1.4tn leverage exposure, which is a conservative estimate considering we are using US GAAP numbers and not leverage exposure.
- And it’s not very profitable: “At the same time, in our view, DBK’s US business has been suffering from persistently low profitability for a few years now. We estimate ROE would be somewhere in the 0-2% range at best in 2017.”
- The rates business in the US is unattractive:“We believe the balance sheet intensity of the Rates business would be making it an unattractive business for DBK in the US.”
- So is the equities business: “We believe it is also fair to assume, based on the continued underperformance of the Equities franchise since the latter half of 2015, that US Equities Sales and Trading business is a potential drag on the ROE from Americas as well.”
- And the investment banking business is no better: “We believe DBK has a sizable corporate lending business in the US and the question arises if this business is ROE accretive for the CIB or needs to be restructured as well.”
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